VAT (the acronym for Value Added Tax) is a consumption tax applied in all Europe by each European state (meaning “country”) at different rates (ranging from 15% in Luxembourg to 27% in Hungary), albeit under common rules. VAT must be embedded in the retail price.
There is a specific VAT regime concerning distance selling of products within Europe. It applies only to business to consumer (B2C) sales and can be summarized (inasmuch as possible!) in the following way.
Distance selling means sales to consumers: individuals making the purchase outside of any business or profession.
Domestic sales
For sales within the boundaries of a single EU country (for instance, a using a warehouse in the United Kingdom to ship parcels to British consumers), VAT will always apply according to the invoicing rules and the applicable VAT rate of that country (in our case, the UK). Usually, a country applies multiple VAT rates and some products are even VAT-exempt (in the UK, child apparel).
When using a warehouse in another EU country, a merchant will need, in most cases, to register for VAT in the country where the warehouse is located, regardless of the amount of sales carried out. There is no minimum turnover required.
Qualified tax advice on the specific case is always highly recommended.
Cross-border sales between EU countries
It gets a bit trickier with cross-border sales from a place of dispatch in one European country to consumers situated in other European countries. Everything depends from the yearly turnover made by the online merchant with cross-border sales to the specific EU country where the goods are delivered.
Basically, the rule is the following:
1) Up to a specific yearly threshold of cross-border sales generated by our merchant from one European country (we will call it Country A) to consumers in another European country (Country B), VAT will (still) be applicable in Country A. These thresholds vary from destination country to destination country, usually ranging between Eur 35,000 and 100,000 per calendar year. Shipping expenses charged to consumers need to be included in the calculation.
Let us make an example:
An online merchant employs a U.K. warehouse to ship products from the UK to German consumers. The turnover threshold in Germany under the VAT distance selling regime is Eur 100,000.
In year 2016, the merchant ships products from the UK warehouse to German consumers for a consolidated retail price of Eur 20,000 plus shipping expenses worth Eur 5,000=
The Eur 100,000 threshold is clearly not met in 2016 and, thus, the merchant will apply UK VAT on all its 2016 sales, needing to be registered for VAT in the UK from the start and to make quarterly VAT payments to the UK tax authorities.
2) Everything changes when, during a calendar year, a merchant shipping from Country A exceeds the yearly threshold of sales to Country B for VAT purposes. In this case, starting from the date when the merchant exceeds the yearly threshold of Country B, they will need to apply VAT in Country B, and no longer in Country A, on all sales to consumers in Country B for the remaining part of that calendar year and in the subsequent one.
Back to our example:
In calendar year 2017, our merchant ships from the UK warehouse products to German consumers for a consolidated retail price of Eur 110,000 plus shipping expenses worth Eur 25,000=
In this case, the yearly Eur 100,000 threshold is met and once the merchant such threshold, it will have to apply German VAT on all its subsequent sales to German consumers in both 2017 and 2018. For this purpose, it will be wise for the merchant to apply with the German tax authorities for the issuance of a German VAT number in slight advance, as the very one sale with which the merchant exceeds the threshold will be already subject to German VAT.
It is not ended, though.
3) If during one of the following calendar years, our merchant, shipping from Country A, fails to reach the yearly revenue threshold of Country B, from the subsequent calendar year VAT will become applicable in Country A again, and no longer in Country B:
In year 2018, our merchant ships products from the UK warehouse to German consumers for a consolidated retail price of only Eur 30,000 plus shipping expenses worth Eur 6,000=
The merchant has not met the Eur 100,000 yearly threshold in distance sales to Germany. From the 1st of January 2019, they will apply UK VAT again as long as the yearly threshold is not exceeded again.
This Euro 100,000 threshold applies to all sales from European countries to Germany. Other destination countries apply lower thresholds: Eur 35,000 in France and Spain, GBP 70,000 in the UK, etc.
These are the thresholds:
Austria € 35.000
Belgium € 35,000
Bulgaria 70,000 BGN
Croatia 270,000 HRK
Cyprus € 35,000
Czech Republic 1,140,000 CZK
Denmark 280,000 DKK
Estonia € 35,000
Finland € 35,000
France € 35,000
Germany € 100,000
Greece € 35,000
Hungary 8.800.000 HUF
Ireland € 35,000
Italy € 35,000
Latvia € 35,000
Lithuania € 35,000
Luxembourg € 100,000
Malta € 35,000
Netherlands € 100,000
Poland 160,000 PLN
Portugal € 35,000
Romania 118,000 RON
Slovakia € 35,000
Slovenia € 35,000
Spain € 35,000
Swede 320,000 SEK
United Kingdom £ 70,000
As you can see, all merchants using a warehouse on European soil for fulfilment need to constantly monitor their EU cross-border sales and, potentially, to register and deregister for VAT purposes in various countries multiple times.
A solution to avoid this “administrative burden” is to exert an option with the local tax authorities in order to always apply VAT in Country B, that is where the products are delivered, regardless of the turnover in cross-border sales to to Country B. It is a choice expressly allowed by EU law. However, there may be discrepancies between the regulations of the various EU states.
Personal and tailored tax advice is always highly suggested!
About the Author
Alan Rhode is a co-founder at Taxmen.eu. Taxmen was established in 2012 to provide one-stop-shop compliance services for VAT on distance selling and environmental regulations on e-commerce packaging in all the European jurisdictions. It has subsequently widened its tax activities, which now range from customs planning to transfer pricing. From 2014, the company provides legal services specifically tailored for the IT sector under the brand Lawmen.
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